Compliance with SMSF residency rules — recent case

Maintaining an SMSF as a resident fund is an essential element of the fund's complying status.

A recent case highlights the drastic effects of a non-complying fund assessment.

If a member of an SMSF is outside Australia for an extended period, then the SMSF's trustees (or the directors of the trustee) and the SMSF's advisors need to plan carefully.

What are the key messages of the case for SMSF trustees (and directors) and members — and their advisors?

A recent case about SMSF residency issues (CBNP Superannuation Fund v Commissioner of Taxation[1]) has these key messages for SMSF trustees (and directors) and members — and their advisors:

• SMSF trustees and members must ensure that at all times their SMSF complies with the central management and control test and the active members rule so that the SMSF is a resident regulated superannuation fund;
• An SMSF that is not considered a resident regulated superannuation fund, will not satisfy the compliance requirements under the SIS Act[2], and therefore will not be a complying superannuation fund;
• Any discretion that the Commissioner of Taxation may normally have[3] to treat a non-complying superannuation fund as a complying superannuation fund, for the purpose of reducing tax penalties, is not available for an SMSF that is non-resident; and
• An SMSF that is not complying forfeits its concessional tax status and suffers a substantial tax penalty.

Remind me: how do the SMSF residency rules work?

An SMSF — to be a complying superannuation fund — must be an 'Australian superannuation fund' that:

• has been established in Australia or has an asset in Australia;
• has its central management and control in Australia: this essentially means that the trustees, or directors of the trustee, that principally make decisions about an SMSF must reside in Australia (with an exception that they may be temporarily outside Australia for up to 2 years), and
• complies with the active members asset rule.

You can read an earlier article on the SMSF residency rules here.

Also, here you can read the ClearLaw article that discusses this issue in the context of SMSFs with instalment warrant arrangements.

Summary of CBNP Superannuation Fund v Commissioner of Taxation

Facts

Established in 1994, the CBNP Superannuation Fund (the SMSF), was a sole member fund with a corporate trustee, being CBNP. The member, Mrs M, was the sole director of CBNP up until January 2006 when she appointed her brother Mr Nicol as another director.

From 1 July 2000, Mrs M ceased to be a resident of Australia for taxation purposes, and moved to New Zealand. Therefore, since 1 July 2000, the central management and control of the SMSF had been overseas.

In 2004, an audit of the SMSF uncovered a breach of the 'in-house asset' rules which was reported to the Commissioner. Based on this report, the Commissioner followed up with a notice of non-compliance stating that the SMSF did not meet the residency rules[4] under the SIS Act, for the year ended 30 June 2004.

Arguments

The directors of the trustee:

• agreed that the SMSF was not a resident SMSF at all times during the year ended 30 June 2004;
• however, argued that the Commissioner should exercise its discretion under section 42A(5) of the SIS Act and treat the Fund as a resident superannuation fund for this period.

What was at stake?

At stake was the SMSF being declared a non-complying fund and — as a consequence — being assessed at the highest marginal tax rate:

• on its income in the year it became non-complying;
• on its income in subsequent years; and
• on the market value of the assets in the fund in the year it became non-complying.

The Court's Decision

The Court held that:

• the SMSF was not a resident superannuation fund at all times during the year ended 30 June 2004, as the central management and control was not in Australia;
• Mrs M was not 'temporarily absent from Australia' and she was outside Australia for a continuous period of over 2 years[5];
• the SMSF was an SMSF but was not a complying superannuation fund, because it was not a resident superannuation fund;
• the discretion given to the Commissioner to treat non-complying superannuation funds, as complying[6], is not able to be exercised if an SMSF is a non-resident superannuation fund; and
• the discretion is only available to a superannuation fund if it satisfied the residency rules[7].

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on SMSFs â?? www.cleardocs.com

Read

You can read more ClearLaw articles relevant to residency issues:

"An SMSF member may appoint their representative to be trustee in their place â?? ATO guidance released."

You can read earlier ClearLaw articles on a wide range of SMSF topics here.

Order SMSF related document packages

Set up an SMSF
Update an SMSF deed
Set up an SMSF pension
Arrange SMSF borrowing lending docs:

• for when the lender is a bank
• for when the lender is a related party

Set up an SMSF corporate trustee

SMSF Death Benefit Nomination — binding or non-binding
An SMSF Death Benefit Agreement — binding and permanent

Download checklist

Download a checklist of the information you need to order a document package.

[1] [2009] AATA 709.

[2] Section 42A of the SIS Act.

[3] Section 42A(5) of the SIS Act.

[4] Section 42A(1) of the SIS Act.

[5] CBNP Superannuation Fund v Commissioner of Taxation [2009] AATA 709 at 14.

[6] Section 42A(5)(b) of the SIS Act.

[7] Section 42A(1).